Case Study - New Mustachian - How am I doing and what to do with cash

[riverotter]

I have just discovered the MMM blog and forums and need some advice on how I am doing financially and what to do with some cash I currently have sitting around.  Definitely not as frugal as we need to be, but we started saving early. I have always envisioned working well into my 50s, but after reading this blog I realized that I could be done much sooner. I gotta get the wife on board with the frugality bit, but being semi-retired by 40 seems more attainable all the time. Questions at the bottom.

Married: 32 yrs old
Combined Income averages $200K year total (my income is highly variable)

Assets
House $325,000
Land - $140,000
Cash - $70,000
401K - $205,000
SEP/IRA - $30,000
1/2 interest in rental property = ($115,000/2) = $57,500
Notes owed to me at 10% and 6% = $65,000
Car, collectibles, metals = $25,000

Total = $917,500


Liabilities
Mortgage home at 3.95 - $185,000
Mortgage land at 5.5 - $60,000
Rental Prop Mtgs at 5% (1/2 of $75K) = $37,500
Student loans at 2.5% = $2,500

Total = $285,000

My questions are: 1) What should I do with the cash?  Paying off the land mortgage makes the most sense from an interest rate perspective.  If that one gets paid off do I then pay down the home mortgage when it has such a low interest rate?  I am always on the hunt for rental property, but I feel like maybe I would be better off to pay off some more of the debt and get something out of the cash now since it may take 6 months to a year to find a good deal.  2) Or should I put the cash in a taxable investment account? 

Thank you!

[RichMoose]

You definitely are holding a substantial amount of cash. I would say that paying the land mortgage would be a pretty good step, especially if the interest is not 100% tax deductible. Guaranteed 5.5% return on your money. If your income is highly variable, it would be smart to have an emergency fund set up to cover 3-6 months expenses. You can set up a online high interest savings account or taxable account for this. That would likely take up the remaining amount in your cash fund.

I'm assuming you are now maxing out your 401(k) and IRA opportunities based on your income. If rental properties are generally good in your area that may be a smart long-term investment. If not, setting up a taxable account and purchasing low-cost index funds is a great option as well.

Try and nail down your expenses so you can maximize your savings. You already have quite significant assets and a high income; retirement / financial freedom may be closer than you think.

[Chrissy]

I agree with TuxedoEagle.  First, the land mortgage.  Then, leave the rest as your emergency fund if you don't have one.  If you DO have an emergency fund that you didn't include in your post, optimize your tax-advantaged accounts:  look at upping the 401k/SEPP contributions.  Doing so might get your combined income down to a point that you could contribute to a ROTH IRA with additional funds.  If those options aren't available, yes a taxable investment account.

Don't pay down the mortgage.  The mortgage interest rate is so low that your money would do better in other investments.

With just a few tweaks, retired or semi-retired at age 40 is definitely within reach.  If you post more details about your spending, the contributors to the forum are very good at finding places to tighten.

[seattlecyclone]

Can you explain why you own the land, what you plan to do with it, etc.? Are you farming it? Planning to build your dream home on it? Speculating, hoping for a future price increase?

Realize that it's likely costing you money between the mortgage interest and property taxes. There's nothing necessarily wrong with that if you have some grand plan for it, but if you don't really plan to use it much for several years you might be able to retire sooner if you sell the land, invest the proceeds, and buy a similar parcel when you really want to use the land for something.

[Thegoblinchief]

Can you explain why you own the land, what you plan to do with it, etc.? Are you farming it? Planning to build your dream home on it? Speculating, hoping for a future price increase?

Realize that it's likely costing you money between the mortgage interest and property taxes. There's nothing necessarily wrong with that if you have some grand plan for it, but if you don't really plan to use it much for several years you might be able to retire sooner if you sell the land, invest the proceeds, and buy a similar parcel when you really want to use the land for something.

+1